‘It’s possible to break into top 50 in the next three years...’

This index is for cross-country comparison, and has to use a standard approach to all countries, says Arvind Virmani.

Arvind Virmani

Arvind Virmani, India’s former chief economic adviser, speaks to Pawan Bali about India’s dramatic rise in the World Bank’s Ease of Doing Business report to the 100th position and what could be done to break into top 50.

India has jumped 30 places in the World Bank’s Ease of Doing Business list to be at the 100th position. What is its significance?
EoDB was one of the targets set by the Narendra Modi government in 2014. As there was little change last year, analysts begin to question the government’s performance. The 30-rank improvement puts a stamp of approval on their effort and greatly improves the credibility of the government.

While India has made an improvement in protecting minority investors’ interest, it still ranks poorly at enforcing contracts in the World Bank’s EoDB list. What needs to be done?
The higher judiciary should take a serious look at its own performance and focus on improving the pace of case disposal. This will require modernisation of every aspect of the work of the courts.

Despite the government’s emphasis on promoting start-ups, the World Bank puts India at 156th position among 190 countries on starting new business. As far as construction permit is concerned India ranked poorly at 181. What can do done to improve this?
I am a little surprised at this, because I had heard reports from young start-ups that the process has become quite easy. I expect to see a significant improvement in this item next year.

As the World Bank report did not consider GST as its cut off date was June 1, there is a debate whether next year it will lead to further improvement in India’s ranking or deterioration due to initial teething problems in its implementation. What do you think?
There will certainly be an improvement in terms of the legal structure of taxation, because of the reduction in number of different taxes. However, a larger jump will happen if the government eliminates some of the unnecessary design and bureaucratic complexities it has introduced. The government has given an indication that it will take some of these steps in the six-seven months available.

Do you think breaking into top 50 on EoDB is possible in the next few years, as Prime Minister Narendra Modi has set a target? What needs to be done?
I think it’s possible to break into the top 50 in the next three years. It’s difficult to do in less than that time because three-four of the worst indicators are outside the direct control of the Centre. Persuading the states and judiciary to improve things will add some time.

Some critics point out that the survey takes into account only two cities — Delhi and Mumbai (as it does for all other countries) — and doesn’t take reflect the situation of the entire country as far as ease of doing business is considered?
This index is for cross-country comparison, and has to use a standard approach to all countries. In this case it uses two cities per country. So the same criticism can be made for every large country and perhaps all medium size countries.

Do you see India’s jump in ease of doing business leading to greater inflows of FDI and FII into the country?
The index is more important for small and medium-sized US and European companies than for large multinational companies because the latter have many other channels for getting information. The improved rank will help increase FDI from highly specialised and competitive SMEs, including those at the higher end of technology spectrum.

Do you see any attempt form the government to remove bureaucratic hurdles for businesses help in revival of private investment?
Domestic private investment by small and medium industry is more likely to be encouraged, because the difficulties and costs of bureaucratic delay and oppression constitutes a much larger percentage of their costs than for large industry.

The government’s announcement on mega infrastructure projects like Bharatmala and recapitalisation of state-run banks help in growth. There are concerns that infusion of capital in banks may lead to slippage on fiscal deficit.
My analysis of the economy’s growth decline showed that an acceleration of capital expenditure by the Centre was the best way to stimulate the economy. Recapitalisation is an essential element of a programme for solving the NPA problem paralysing credit by public sector banks. The effect on the fiscal deficit can be minimised through financial engineering as was done earlier for recapitalisation.

Will recent spike in crude oil impact CAD to significant level and what will be its impact on inflation and overall monetary policy of the RBI?
Oil and other commodity prices have bottomed out and are likely to rise. The net effect of this up trend will of course be to raise the current account deficit that had reached very low levels. The effect on inflation is very marginal, but will be used by the RBI, Monetary Policy Committee to keep monetary policy tighter than it should be.

There is a demand for complete overhaul of tax slabs. What is your view and what should be tax slabs rates?
I have argued in several papers over the last decade for a single uniform rate on all goods and services subject to two special provisions to ensure a progressive (equitable) and revenue neutral system. One is to exempt (zero tax) basic food, education and health from this rate to ensure that poor pay a lower average rate on their overall consumption. Second is to put surcharges on six to nine goods and services that are either heavily polluting (for example, petrol and diesel), harmful to health (like tobacco) or luxuries (large cars, five star hotels).

From next year the government will get into the election mode. Do you see any possibility of populist announcement by the Centre?
I believe the government will stick to the fiscal targets proposed by the Finance Commission, continue to reform the tax-subsidy-transfer system, continue disinvestment, but perhaps also announce a few eye-catching schemes for the poor and less well-off.